Pages

Wednesday, 11 September 2013

The Internet
and Social Media change our way of decision-making. We are no longer the
independent decision makers we used to be. Instead, we have become networked
minds, social decision-makers, more than ever before. This has several fundamental
implications. First of all, our economic theories must change, and second, our
economic institutions must be adapted to support the social decision-maker, the
"homo socialis", rather be tailored to the perfect egoist, known as
"homo economicus".

The financial, economic and public debt crisis has seriously damaged
our trust in mainstream economic theory. Can it really offer an adequate
description of economic reality? Laboratory experiments keep questioning one of
the main pillars of economic theory, the "homo economicus". They show
that the perfectly self-regarding decision-maker is not the rule, but rather
the exception [1,2]. And they show that markets, as they are organized today,
are undermining ethical behavior [3].

Latest scientific results have shown that a "homo socialis"
with other-regarding preferences will eventually result from the merciless
forces of evolution, even if people optimize their utility, if offspring tend
to stay close to their parents [4]. 1Another,
independent study was recently summarized by the statement "evolution will
punish you, if you're selfish and mean" [5]. Is this really true? And what
implications would this have for our economic theory and institutions?

In fact, the success of the human species as compared to others
results mainly from its social nature. There is much evidence that evolution
has created different incentive systems, not just one: besides the desire to possess
(in order to survive in times of crises), this includes sexual satisfaction (to
ensure reproduction), curiosity and creativity (to explore opportunities and
risks), emotional satisfaction (based on empathy), and social recognition
(reputation, power). Already Adam Smith noted: "How ever selfish man
may be supposed, there are evidently some principles in his nature, which
interest him in the fortune of others, and render their happiness necessary to
him, though he derives nothing from it."2

Dirk Helbing, professor of sociology at ETH Zurich and complexity
scientist concludes: "The social nature of man has dramatic implications,
both for economic theory and for the way we need to organize our economy."
As we are more and more connected with others, the "homo economicus",
i.e. the independent decision-maker and perfect egoist, is no longer an
adequate representation or good approximation of human decision-makers. "Reality
has changed. We are applying an outdated theory, and that's what makes economic
crises more severe," says Helbing.

Outdated
theory, outdated institutions

In fact, recent experimental results suggest that the majority of
decision-makers are of the type of a "homo socials" with equity- or
equality-oriented fairness preferences [1,6]. The "homo socialis" is
characterized by two features: interdependent decision-making that takes into
account the impact on others and conditional cooperativeness. However, the
"homo socialis" takes self-determined, free decisions. He is not
ripping off others, afterwards giving back some of the benefits to others
through taxes or philanthropy. The "homo socialis" decides rather differently,
more considerately, recognizing that friendly and fair behavior can generate
better outcomes for everybody.

"But social behavior is vulnerable to exploitation by the 'homo
economicus'," continues Helbing. In a selfish environment, the 'homo
socialis' cannot thrive. In other words, if the settings are not right, the
'homo socialis' behaves the same as the 'homo economicus'. "That's probably
why we haven't noticed its existence for a long time," believes Helbing.
"Our theories and institutions were tailored to the 'homo economicus', not
to the 'homo socialis'."

In fact, many of today's institutions, such as homogeneous markets
with anonymous exchange, undermine cooperation in social dilemma situations,
i.e. situations in which cooperation would be favorable for everyone, but
non-cooperative behavior promises additional benefits [7, Fig. 2].

New
institutions for a global information society

In the past we have built public roads, parks and
museums, schools, libraries, universities, and homogeneous markets on a global
scale. What would be suitable institutions for the 21st century? "Reputation
systems can transfer the success principles of social communities to our
globalized society, the global village", suggests Helbing. Most people and
companies care about reputation. Therefore, reputation systems could support socially
oriented decision-making and cooperation, with better outcomes for everyone [8].
In fact, reputation systems spread on the Web 2.0 like wildfire. People rate
products, sellers, news, everything, be it at amazon, ebay, or trip adviser. We
have become a "like it" generation, because we listen to what our
friends like.

Importantly, recommender systems should not narrow down
socio-diversity, as this is the basis of happiness, innovation and societal
resilience. "We don't want to live in a filter bubble, where we don't get
an objective picture of the world anymore," says Helbing with reference to
Eli Pariser [9]. Therefore, reputation systems should be pluralistic, open, and
user-centric. "Pluralistic reputation systems are oriented at the values
and quality criteria of individuals," explains Helbing, "rather than
recommending what a company's reputation filter thinks is best. Self-determination
of the user is central. We must be able to use different filters, choose the
filters ourselves, and modify them." The diverse filters would mine the
ratings and comments that people leave on the Web, but also consider how much
one trusts in certain information sources.

"Reputation creates benefits for buyers and sellers," says
Helbing. A recent study shows that good reputation allows sellers to take a
higher price, while customers can expect a better service [10]. Reputation
systems may also promote better quality as well as socially and environmentally
friendly production, suggests Helbing. "This could be a new approach to
reach more sustainable production, based on self-regulation rather than
enforcement by laws." One day, reputation systems may also be used to
create a new kind of money, speculates Helbing. The value of "qualified
money" would depend on it's reputation and thereby create incentives to
invest in ways that increase a money unit's reputation. It might create a more
adaptive financial system and help to mitigate the recurrent crises we are
facing since hundreds of years. But the details still have to be worked out.

Benefits of a
self-regulating economy

Reputation systems could overcome some of the unwanted side effects
of anonymous exchange thanks to pseudonymous or personal interactions. Thereby,
they could potentially counter "tragedies of the commons" such as global
warming, environmental exploitation and degradation, overfishing, .. -
constituting some of our major unsolved global problems. We can witness such
kinds of "social dilemma problems" everywhere. So far, governments
try to fix them with top-down regulations and punitive institutions. However,
these are very expensive, and often quite ineffective. "Basically all
industrialized countries suffer from exploding debts," says Helbing.
"I believe we cannot pay for this much longer, we are at the limit. We
need a new approach." As Albert Einstein pointed out: "We cannot solve
our problems with the same kind of thinking that created them."

Institutions supporting the "homo socialis" such as
suitably designed reputation systems would enable a self-regulation of
socio-economic systems. "But self-regulation does not mean that everyone
can choose the rules he likes," explains Helbing. "It only works with
an other-regarding element. The self-regulation rules must be able to achieve a
balance between the interests of everyone, who is affected by the externalities
of a decision."

Helbing explains the benefits: "Other-regarding decisions can
overcome the classical conflict between economic and social motives.
Self-regulation could also overcome the struggle between the bottom-up
organization of markets and the top-down regulation by politics. This would
remove a lot of friction from our current system, making it much more efficient
- in the same way as the transition from centrally planned economies to
self-organized markets has often created huge efficiency gains."

This can be illustrated with an example from urban traffic
management. "Traffic control is a problem where not everybody's desires
can be satisfied immediately and at the same time, like in economic systems. It
is a so-called NP-hard optimization problem - the computational effort explodes
with system size, as for many economic optimization problems, e.g. in
production and logistics." The study compares three kinds of control: A
centralized top-down regulation by a traffic center, the classical control
approach, and two decentralized control approaches. The first one assumes that
each intersection independently minimizes the waiting times of approaching
vehicles, as a "homo economicus" would do. The second one decides in
an other-regarding way: it interrupts the minimization of waiting times, when
this is needed to avoid spill-over effects at neighboring intersections.
Helbing summarizes: "The 'homo economicus' approach works well up to a
moderate utilization of intersections, but queue lengths get out of control long
before the intersection capacity is reached. The bottom-up self-regulation
based on the principle of the 'homo socialis' approach beats both, the
centralized top-down regulation and the bottom-up self-organization based on
principles of the 'homo economicus'. Other-regarding behavior improves the
coordination among neighboring intersections. It makes Adam Smith principle of
the 'invisible hand' work even at high utilizations."

Economics 2.0:
Emergence of a participatory market society

But will such a self-regulating system ever be implemented? Helbing
is convinced: "It's already on its way. The Web 2.0, in particular
reputation systems and social media are driving the transition towards a new
economy, the economy 2.0. We see already a new trend towards decentralized,
local production and personalized products, enabled by 3D printers, app stores,
and other technologies."

Such developments will eventually create a participatory market
society. "Prosumers", i.e. co-producing consumers, the new
"makers" movement, and the sharing economy are some examples
illustrating this. "Just think of the success of Wikipedia, Open Streetmap
or Github. Open Streetmap now provides the most up-to-date maps of the world,
thanks to more than 1 million volunteers." Helbing stresses: "This is
just the beginning of a new era. A new intellectual framework is emerging, and
a creative and participatory era is ahead. The paradigm shift towards
participatory bottom-up self-regulation may be bigger than the paradigm shift
from a geocentric to a heliocentric worldview. If we build the right
institutions for the information society of the 21st century, we will finally
be able to mitigate some very old problems of humanity. 'Tragedies of the
commons' are just one of them. After so many centuries, they are still plaguing
us, but this needn't be."

[1]Experts should note that there has been research on so-called "altruistic behavior" in social dilemma situations such as the prisoner's dilemma since more than 3 decades. However, if scientists would have understood the "homo socialis" with other-regarding preferences already before, the key concept of the "homo economicus" should have disappeared from the economic literature since a long time, but it didn't for a reason. In fact, the increasing empirical and experimental evidence for fairness preferences and unexpectedly high levels of cooperation in one-shot prisoner's dilemma, dictator and ultimatum games have been waiting for a convincing theoretical explanation until very recently. It is important here to distinguish between other-regarding preferences and cooperative ("altruistic") behavior. Other-regarding preferences means that people intentionally do not maximize their payoffs, but try to consider and improve the benefits of others. Most game theoretical work is strictly compatible with the concept of "homo economicus", identifying mechanisms that make it advantageous in one way or another to cooperate. For example, if the "shadow of the future" in repeated prisoner's dilemma interactions is long enough, it creates a higher payoff when people cooperate, and that's why they do it. In other words, some mechanisms such as repeated interactions, punishment, transfer payments, and others change the payoff structure of a prisoner's dilemma game such that there is no dilemma anymore. Martin Nowak has mathematically shown that many such mechanisms can be understood with Hamilton's rule, according to which people cooperate when the benefits of cooperation exceed the costs. Other work shows that cooperation in prisoner's dilemma games may survive if people imitate more successful behavior of neighbors, but if one believes in rational choice, why should people imitate, if they can reach a higher payoff by another behavior? In fact, all such cooperation in spatial prisoner's dilemma games disappears, if imitation is replaced by a "best response" rule, which assumes a strict maximization of utility, based on the previous decision of the interaction partners. In Ref. [4], Grund et al. have combined such a "best response" rule with standard evolutionary rules of mutation and selection, when people reproduce. The unexpected outcome was a "homo socialis", if offspring stay close to their parents, which they often do. But the transition is not smooth. It requires the population to go through a phase where unconditionally "friendly" behavior is dysfunctional, which happens only by "mistake" (due to mutations). Random spatio-temporal coincidence of people with friendly traits is equally important for other-regarding preferences to emerge. However, conditionally cooperative behavior resulting from other-regarding preferences may also occur between strangers, i.e. they do not require genetic relatedness, as the following movie shows: http://vimeo.com/65376719. In any case, spatio-temporal correlations (here: the co-evolution of individual preferences and behavior) can promote cooperation more than expected for a payoff-maximizing "homo economicus". These new discoveries mean that key concepts of both, the theory of evolution and of economics, must be reconsidered.

[10] Przepiorka, W., "Buyers pay for and sellers invest in a good
reputation: More evidence from eBay,'' The Journal of Socio-Economics 42, 31-42
(2013).

Dirk
Helbing is Professor of Sociology, in particular of
Modeling and Simulation, and member of the Computer Science Department at ETH
Zurich. He earned a PhD in physics and was Managing Director of the Institute
of Transport & Economics at Dresden University of Technology in Germany. He
is internationally known for his work on pedestrian crowds, vehicle traffic,
and agent-based models of social systems. Furthermore, he coordinates the FuturICT
Initiative (http://www.futurict.eu),
which focuses on the understanding of techno-socio-economic systems, using Big
Data. His work is documented by hundreds of scientific articles, keynote
lectures and media reports worldwide. Helbing is elected member of the World
Economic Forum’s Global Agenda Council on Complex Systems and of the German
Academy of Sciences “Leopoldina”. He is also Chairman of the Physics of
Socio-Economic Systems Division of the German Physical Society and co-founder
of ETH Zurich’s Risk Center.

FuturICT Hubs

Followers

FET Flagship Initiative

The activities leading to these results has received funding from the European Union Seventh Framework Programme (FP7/2007-2013) under grant agreement n° 284709 - project 'FuturICT', a Coordination and Support Action in the Information and Communication Technologies activity area